Oil & Gas: Producer / Explorer

Transcription

1 Oil & Gas: Producer / Explorer EGO.asx Speculative Buy Empire Oil & Gas Ltd (EGO) EMPIRE OIL & GAS LTD (EGO) Change of CEO as Kingia/High Cliff Play Heats Up EGO have recently announced a change of CEO. Current CEO, Ken Aitkin, will step down with immediate effect and will be replaced by Angus Walker. We continue to rate EGO a Speculative Buy. However, upside above the current share price is highly dependent on further exploration success, with the Kingia/High Cliff targets representing in our view their most prospective leads. Funding for exploration however will likely require a farm out and while this potentially could be a significant positive catalyst for the stock price, it also presents a risk if current plans cannot be achieved. AWE/Origin Energy outline further Kingia/High Cliff Exploration The discovery of high quality reservoir in the Kingia and High Cliff Sandstone at Waitsia by AWE/Origin Energy has revitalised exploration in the Perth Basin. The Stage 1 development of Waitsia continues to perform in line with expectations. As a result, AWE and Origin Energy have agreed to commence the design phase of FEED for Waitsia Stage 2 and final appraisal and marketing for Stage 2 sales has commenced. A key question now is whether the Waitsia discovery is a one-off in the Kingia/High Cliff or part of a broader play? In a positive sign for an expanded play potential, AWE and Origin Energy have outlined a number of potential Kingia/High Cliff leads beyond Waitsia in EP320 were they are planning a 3D Seismic programme to mature significant Waitsia type prospects in the east of the permit and in L11 were they are considering an exploration well to test the Kingia and High Cliff directly beneath the Beharra Springs Gas Field. EGO next most prospective for Kingia/High Cliff Based on our analysis we expect that the vast majority of acreage prospective for the exciting Kingia/High Cliff Play is already permitted by AWE/Origin Energy. However, we believe that EGO has a strong case to put forward for Kingia/High Cliff prospectivity in the Western portions of its Northern Perth Basin permits EP368 and EP426 (and perhaps in EP432 to the South). Within EP368/EP426 EGO has identified two potentially large Kingia/High Cliff targets, Lockyer Deep and North Erregulla Deep. These gas prospects are located just 15km East of AWE s Waitsia discovery. In EP432, the Black Swan Survey imaged a large north-south structural trend and offset well data indicates the High Cliff/Kingia sandstones are present. A farm out continues for the former and a 2D survey is currently being planned for the latter. Key Table: EGO NAV - Further Exploration Success is Key Share Price Valuation (NAV) A$ m Un-risked Risking Risked cps Red Gully Gas Plant % Red Gully North Oil % Red Gully North Gas % Other Exploration Net Debt & Corp Valuation 27.1 Source: Hartleys Research 25 Jul 2017 Share Price: $ mth Price Target: $0.27 Brief Business Description: EGO is a gas producer and explorer with a core focus on the Perth Basin. Key asset is the Red Gully Gas plant Hartleys Brief Investment Conclusion EGO generates cash flow from gas sales from the Red Gully Gas plant. We view EGO as having the second most propsective exploration position in the Perth Basin (after AWE/ORG). Chairman & CEO: Antonino (Tony) Iannello Chairman Angus Walker CEO Substantial Shareholders: Mineral Resources Limited 19% Vison Pty Ltd (Philip Garratt) 7% Dynamic Supplies Investment Pty Ltd 4% Company Address: 229 Stirling Highway Claremont WA 6010 Issued Capital: 102m - fully diluted 119m Market Cap: $12.8m - fully diluted $14.9m Current Debt Current Cash FY16A FY17F FY18F Prod (TJ) 2,985 2,291 2,168 Op Cash Flw $7m $7m $8m Free Cash Flw -$9m -$2m $3m NPAT* (A$m) $4m $2m $3m EPS ($, bas)* 3.26x 1.32x 2.16x P/E (basic)* 3.8x 9.5x 5.8x EV / EBIT 10.7x 9.8x 6.4x EV / EBITDA 2.8x 3.2x 2.8x N.D. / equity 20% 23% 18% Net Cash End -$12.3m -$14.1m -$11.3m *normalised Source: Hartleys Research Aug-16 Authors: Aiden Bradley Empire Oil & Gas Industrials and Energy Analyst Ph: E: aiden.bradley@hartleys.com.au $15.1m $1.1m A$ M Dec-16 Mar Jul-17 Volume - RHS Source: IRESS EGO Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 20 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website

2 SUMMARY MODEL Empire Oil & Gas NL Share Price 25 July 2017 EGO $0.125 Speculative Buy Key Market Information Directors Company Information Share Price $0.13 Antonino (Tony) Iannello Chairman Ground Floor Market Capitalisation $13m Stuart Brow n NED 229 Stirling Highw ay Philip Garratt NED Claremont Issued Capital 102m Tom Vincent NED WA 6010 Issued Capital (fully diluted inc. ITM options) 119m Angus Walker CEO w w w.empireoil.com.au Options 17.0m Rachel Rees CFO & Company Secretary EV $27m Net Debt $14m Substantial Shareholders m shares % Valuation 2 Mineral Resources Limited % 12 Month Price Target $ ps Vison Pty Ltd (Philip Garratt) % 5 Dynamic Supplies Investment Pty Ltd % P&L Unit 2014A 2015A 2016A 2017F 2018F 6 7 Production Summary Unit 2014A 2015A 2016A 2017F 2018F Net Revenue COGS (4.5) (5.3) (6.2) (5.9) (4.1) 9 Gas Tj 1,855 2,876 2,985 2,291 2,168 EBITDAX # Condensate k bbl Depreciation/Amort (3.9) (6.9) (7.1) (5.6) (5.5) EBIT (2.2) Net Interest (0.1) (0.3) 0.0 (0.5) (0.5) Price Assumptions Unit 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit (2.3) Tax Expense (0.7) (1.1) Gas A$/Gj NPAT (2.3) Condensate A$/bbl Abnormal Items Reported Profit (2.3) 7.6 (3.3) Share Price Valuation (NAV) Balance Sheet 2014A 2015A 2016A 2017F 2018F A$ m Un-risked Risking Risked cps Cash Red Gully Gas Plant % Other Current Assets Red Gully North Oil % Total Current Assets Red Gully North Gas % Property, Plant & Equip Other Exploration Exploration Net Debt & Corp Investments/other Tot Non-Curr. Assets Valuation 27.1 Total Assets Payables Petroleum Tenements ST Debt + other Total Curr. Liabilities Permit JV Partner % Interest Long Term Borrow ings PL-18 Production License 100% Other PL-19 Production License 100% Total Non-Curr. Liabil PL-96 Pipeline License 100% Total Liabilities EP % EP 426 EGO 78% Net Assets Norw est Energy NL 22% EP 368 EGO 80% Cashflow 2014A 2015A 2016A 2017F 2018F Norw est Energy NL 20% EP 432 EGO 100% EBITDA EP % Chg WC (1.2) (0.6) (2.7) 0.2 (0.2) EP % Interest (0.1) (0.3) 0.0 (0.5) (0.5) EP % Tax (0.7) (1.1) EP 416 EGO 40% Other (6.2) (16.5) (1.2) - - Pilot Energy 60% Gross Cash Flow (5.8) (2.6) EP 480 EGO 40% Pilot Energy 60% Capex (3.3) (19.3) (15.6) (9.1) (5.0) Other Free Cash Flow (9.2) (21.9) (8.6) (1.8) 2.8 Share Issuance Debt Issuance (0.0) Dividend Other 0.2 (0.9) Net Chang in Cash (7.0) 9.6 (8.6) (1.8) 2.8 Ratio Analysis Unit 2014A 2015A 2016A 2017F 2018F Free Cash Flow / share A (7.7) (18.3) (7.2) (1.5) 2.4 Cashflow Multiple X (1.6) (0.7) (1.7) (8.4) 5.3 Earnings Per Share A (1.9) Price to Earnings Ratio X (6.6) EV / EBIT X (12.4) EV / EBITDA X Interest Cover X na Net debt / Equity % 2% 13% 20% 23% 18% Analyst : Aiden Bradley Phone: Sources: IRESS, Company Information, Hartleys Research Last updated July 25, 2017 Page 2 of 20

3 HIGHLIGHTS As we outlined in our recent note on Empire Oil & Gas ( In search of the Kingia/High Cliff Sandstone (19 May 2017)), the Waitsia discovery by AWE/Origin Energy (ORG.asx) has been the most exciting discovery in the Perth Basin in decades. The discovery of high quality reservoir in the Kingia and High Cliff Sandstone at Waitsia has revitalised exploration in the challenging Perth Basin (historically just 20 commercial oil and gas fields from circa 360 wells drilled). AWE/ORG in our opinion has exposure to the majority of the acreage prospective for this new exciting play. In terms of potential exposure to this Play we rate EGO s acreage as the second most prospective after AWE/ORG. Recent appraisal results for Waitsia have been positive, attracting further attention for the Kingia/High Cliff. A key question now for AWE/ORG and other operators with potential exposure is whether the Waitsia discovery is a one-off or part of a broader Kingia/High Cliff Play? AWE/ORG have announced that they are intending to test a number of Kingia/High Cliff targets beyond Waitsia. EGO and their partner Norwest Energy (NWE.asx) are also actively seeking a farm in partner(s) for their Lockyer Deep and North Erregulla prospects. Upside in the EGO share price from here is highly dependent on further exploration success, with the Kingia/High Cliff targets representing in our view their most prospective leads. Successful Appraisal of Waitsia The Stage 1 development of Waitsia continues to perform in line with expectations. Production from Stage 1 of the Waitsia development averaged 9.2TJ/d in the last quarter. Excellent performance continues from the Senecio-3 and Waitsia-1 wells testing multiple zones in each. As a result, AWE and Origin Energy have agreed to commence the design phase of FEED for Waitsia Stage 2. As announced by them in February, marketing for Stage 2 sales has commenced. The first gas sales term sheet for 15TJ/d was signed with AGL. Further substantial sales are expected in CY17 before FID. They are targeting completion of all phases of FEED by the end of CY17, prior to achieving a FID (subject to finalising gas sale agreements). Stage 2 facilities will have capacity of 100TJ/d or roughly 10% of the domestic WA market. Initial testing of the gas market indicated demand levels twice the current booked resource of Waitsia (so circa 800PJ). The final appraisal wells for the Stage 2 development are currently being drilled. The Waitsia-3 appraisal well confirmed the southern extension of the Waitsia Field with strong gas shows across a 150m interval of Kingia/High Cliff Sandstone. The Kingia reservoir was penetrated at 3,211m and the High Cliff at 3,362m. The Kingia reservoir was considerably thicker and better quality than predicted. However, the High Cliff Reservoir (intersected 80m deeper than predicted) while gas-bearing was thinner than predicted and preliminarily indicators are for a tight reservoir. Overall as a result of these findings additional Waitsia 2P Reserves are expected to be booked in 2H17. Page 3 of 20

4 Fig. 1: Depth matters - Kingia/High Cliff - Porosity versus present-day depth Source: AWE Waitsia-4 was spudded on the 10 th July and as of the 17 th July has reached a depth of 1,512m (MRDT). This well is forecast to take 5 weeks to complete to a planned total depth of 3,834m MDRT to test the Eastern extension of the field. Page 4 of 20

5 Fig. 2: Location of Waitsia-3 and 4 Source: AWE Waitsia a one-off discovery or part of a broader play? As mentioned the discovery of the good reservoir in the Kingia and High Cliff Sandstone at Waitsia has revitalised exploration in the challenging Perth Basin and initiated a search by a number of operators to see if this play exists in their acreage. A key question, especially given the history of the Dongara discovery in the Perth Basin, is whether the potentially even larger Waitsia Discovery is a one-off in the Kingia/High Cliff or part of a broader play (with further follow up successes still to come). Page 5 of 20

6 Fig. 3: Perth Basin Discovered Reserves Source: AWE AWE and Origin Energy believe there is broader play potential and have outlined a number of potential Kingia/High Cliff leads beyond Waitsia; EP320: The JV (AWE 33%, Origin Energy 67%) is planning a 3D Seismic programme in EP320 to mature significant Waitsia type prospects in the east of the permit. L11: The JV (AWE 33%, Origin Energy 67%) is considering an exploration well to test the Kingia and High Cliff Sandstones directly beneath the Beharra Springs Gas Field. WA-512-P: (AWE 100%) We were surprised when AWE permitted WA-512-P offshore Perth basin in the Abrolhos and Houtman Sub-basins (post Murphy Oil s 3 high profile failures in WA-481-P). However, with 2D and 3D seismic processed, a farm out process is underway. The company is targeting the same plays as discovered onshore including the Kingia Sandstone. Page 6 of 20

7 Fig. 4: AWE Onshore Perth Basin Acreage Source: AWE Page 7 of 20

8 Fig. 5: Location of WA-512-P Source: WA DMP Having reviewed historical well data, depth charts, company and acreage releases etc. we have very roughly drawn on the following map in yellow the onshore area we believe is most likely prospective for the Kingia/High Cliff Play. It is clear that most of the prospective areas lie within acreage held by AWE. Page 8 of 20

9 Fig. 6: Possible Location of Kingia/High Cliff Sandstone at suitable depths Source: UIL Corporate Presentation and Hartleys Research Our initial analysis would rank Empire Oil & Gas as the next leading independent player, both in terms of exposure to the Kingia/High Cliff Play and overall prospectivity. Page 9 of 20

10 Empire Oil & Gas Kingia / High Cliff Exploration Overview Target A: EGO - EP 426 & EP 368 As discussed previously based on our initial work it is our opinion that the vast majority of acreage prospective for the exciting Kingia/High Cliff Play is already permitted by AWE/Origin Energy. However, we believe that EGO has a strong case to put forward for Kingia/High Cliff prospectivity in the Western portions of its Northern Perth Basin permits EP 368 and EP 426. It should be noted that Norwest Energy (NWE.asx) has exposure to both EP 368 and EP 426 and permits with AWE to the south of the Waitsia discovery. We would therefore rank EGO and NWE as second and third (after AWE) in regards to Independent players with exposure to the Kingia/High Cliff. NWE has a 20% interest in EP 368, 22.22% in EP 426 and % in EP 413. Within EP 368 and EP 426 EGO has identified two potentially large Kingia/High Cliff targets, Lockyer Deep and North Erregulla Deep. These gas prospects are located just 15km East of AWE s Waitsia discovery, with Irwin-1 on the Western boundary of the permits (although noted separated by a major fault). Fig. 7: The Lockyer Deep and North Erregulla Prospects Source: NWE The historical North Erregulla-1 was targeting the Cattamarra Coal Measures and the Dongara/Wagina Sandstones (usually the principal targets in this portion of the Page 10 of 20

11 Basin up until the discovery of Waitsia). The well encountered no hydrocarbons at the Lower Jurassic level, although oil was recovered from the Dongara Sandstone (no trap present). Fig. 8: North Erregulla-1 Well Result Source: DMP Interestingly, as far back as 2010, EGO was flagging the potential for deeper gas potential below the Carynginia Formation in the Irwin River Coal Measures and High Cliff Sandstone. However, until Waitsia proved good quality reservoir existed at a certain depth range it was probably judged too risky to pursue these targets. Fig. 9: North Erregulla-1 Deeper Gas Potential Source: EGO Corporate Presentation As outlined earlier it would seem that buried depth (historical and current) is the key to identifying likely good quality Kingia/High Cliff Reservoir. Depth increases to the East of the Waitsia discovery. Irwin-1 did however prove good quality Kingia reservoir conditions (despite being water-wet). Page 11 of 20

12 North Erregulla Deep Prospect While further East than Irwin-1 (and separated by a fault) it would seem that EGO s two prospects on the western boundary of their permits may be within the prospective depth range for Kingia/High Cliff reservoir. North Erregulla Deep is targeting a mid-case of 55bcf gross (low to high range bcf) and secondary oil target with a mid-case of 3.55mmbbl (low to high range mmbbl) Fig. 10: North Erregulla Deep Prospect Source: EGO Corporate Presentation Lockyer Deep Prospect Lockyer Deep is targeting a low to high range of 25 and 134bcf with a best-case estimate of 58bcf. Page 12 of 20

13 Fig. 11: Lockyer Deep Prospect Source: EGO Secondary Oil Target - Both historic wells North Erregulla-1 and Lockyer-1 encountered oil at the Dongara Sandstone level. EGO has proposed previously targeting this potential oil (e.g. Moriary). However, the risk-reward as a standalone play was not attractive. Fig. 12: Moriary Prospect Time Structure Map EP426 Source: EGO Corporate Presentation Page 13 of 20

14 Fig. 13: Schematic Diagram showing the Moriary Play Source: EGO Corporate Presentation However, shallower oil could be tested as a secondary target on the back of Kingia/High Cliff wells. So, while not the main game, it does de-risk exploration further, while providing material upside in the event of a joint success. Page 14 of 20

15 Fig. 14: Proposed North Erregulla Deep 1 Source: EGO B: EGO EP 432 Given our outline of the potential Kingia/High Cliff play we also believe that EGO has potential in their EP 432 to the South. EP 432 is again potentially a Kingia/High Cliff play with secondary oil potential. The gas play fairway is most likely prospective in our opinion along the Cadda Shelf, overlapping with the area previously flagged by Empire as potentially prospective as a Permian Shale Gas Play. Page 15 of 20

16 Fig. 15: EP 432 Prior Permian Shale Gas Play now Kingia/ Sandstone. Source: EGO Corporate Presentation EGO undertook an airborne geophysical survey over this acreage. This Black Swan Survey imaged a large north-south structural trend and offset well data indicates the High Cliff/Kingia sandstones are present. Although reservoir quality in the only two intersections to date are poor, targets are typically less than 3000m. EGO have recently released that they believe the permit may have potential for a Waitsia play but given localised source rocks with wet gas potential. A 2D survey is currently being planned. Page 16 of 20

17 Fig. 16: EP 432 Black Swan Survey Source: EGO Corporate Presentation Page 17 of 20

18 RECOMMENDATION & RISKS INVESTMENT THESIS & RECOMMENDATION We continue to rate EGO a Speculative Buy with a A$0.27 per share 12-month forward price target. However, upside above the current level in the EGO share price is highly dependent on further exploration success, with the Kingia/High Cliff (KHC) targets representing in our view their most prospective leads. Fig. 17: EGO NPV including Ongoing Corporate Costs Source: Hartleys Research As outlined earlier we rate EGO s exploration potential relatively highly for the KHC Play. We continue to view the Cattamarra Coals as high risk and replacing existing reserves at Red Gully directly with near field targets while a high margin proposition, it remains in our opinion a lower probability. We therefore see the KHC Play at the moment as the most likely source of reserve replacement. Funding for exploration however will require a farm out and while this potentially could be a significant positive catalyst for the stock price, it also presents a risk if current plans for a farm out of its Kingia/High Cliff prospects cannot be achieved. RISKS Investment in the oil and gas sector should be considered high risk. There is no guarantee of exploration success. Further to this, producing assets typically decline without further exploration and development. Specific risks include exploration risk, development risk and production risk. Our exploration valuation includes a risked metric based on prospect size for permits or wells held by the Company. In essence, exploration values assume that the market will recognise a portion of potential value before the results of a well are known. Page 18 of 20

19 SIMPLE S.W.O.T. TABLE Strengths Weaknesses Opportunities Threats Source: Hartleys Research Experienced management team Long history in Perth Basin Numerous drill ready prospects including potential exposure to Kingia/High Cliff Sandstone Existing cashflow Strong domestic gas market MIN on the register Balance sheet debt Relatively short reserves life Red Gull Gas Production in decline Red Gully gas plant improves commercial potential of any nearby discovery Other exploration success including Kingia/High Cliff Sandstone Strong position to lead consolidation of Junior Players in the Basin. Production issues Exploration failure Environmental concerns Page 19 of 20

20 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst John Macdonald Resources Analyst Paul Howard Resources Analyst Aiden Bradley Research Analyst Michael Scantlebury Junior Analyst Janine Bell Research Assistant Corporate Finance Dale Bryan Director & Head of Corp Fin. Richard Simpson Director Ben Crossing Director Ben Wale Associate Director Stephen Kite Associate Director Scott Weir Associate Director Scott Stephens Associate Director Rhys Simpson Manager Registered Office Level 6, 141 St Georges TcePostal Address: PerthWA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner:firstname.lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Chris Chong Digby Gilmour Tia Hall Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Neil Inglis Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Matthew Parker Charlie Ransom Mark Sandford David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Samuel Williams Jayme Walsh Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 20 of 20